Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

The Internet of Everything!

The new frontier in tech investing lies ahead as everything becomes smart and connected.

The "Internet of Things" – that's the new buzzword, the "next big thing" that tech investors are talking about. Ever since Apple (NASDAQ:AAPL) revolutionized the smartphone with its iPhone and the personal computer with the iPad, the industry has gotten the message loud and clear: make everything smart (i.e. give it non-trivial processing power), make everything connected (think Bluetooth, Wi-Fi, NFC, LTE, and so on), and make the world around us "smart." However, the notion of the "Internet of things" is, frankly, confusing to most investors. What do technologists and industry observers really mean when they say the "Internet of Things"?

Let's ask ARM Holdings!There is no company better positioned to really take advantage of everything becoming "smart" than ARM Holdings(NASDAQ:ARMH), the vendor of low-power CPU IP for a variety of uses, from the lowest power micro-controllers to the highest performing smartphones and tablets. Indeed, the company recently gave a very comprehensive presentation outlining the opportunities that lie ahead in this bold, new Internet-of-things world.

To begin, let's take a look at the "fundamental ingredients" of the Internet of Things:

Low Hardware Costs

2012

2016

ARM Cortex-M0 microcontroller

$0.49

<$0.30

Wi-Fi

$1.30

$0.80

Bluetooth

$0.75

$0.35

MEMS Sensor (vibration/accelerometer)

$1.30

$0.95

Camera (1.8-megapixel CMOS image sensor)

$1.70

$1.10

GPS

$1.15

$0.65

Source: Gartner (2013), ARM Estimates.

So, what do these devices need? Well, they'll need a very low-power processor to make them "smart." ARM, for example, believes that its Cortex-M0 microcontroller is a solid choice for this kind of application. The performance isn't anything close to what you'll find in a smartphone, but it's enough to add some brains to these devices. Imagination Technologies, ARM's primary IP competitor, is happy to license low-power MIPS cores to do the job, and even Intel is offering "Quark" – a tiny, low-power X86 solution.

But it's not just about "smart" – it's about "connected" and "aware"If you'll look at the fundamental hardware that ARM believes is necessary for an Internet of Things device, it's clear that it's about much more than just making things "smart" – it's about giving them the ability to connect and the ability to sense. For example, how useful would your iPhone really be if it didn't have Wi-Fi in order to download all of those large games? Or what if it couldn't make phone calls via its cellular connection? Oh, and without built-in GPS, the phone would hardly be as useful as it is today in directing its user to near-by locations. In short, while the "compute" part is important, the ability to "sense" and "connect" is also equally important. Of course, all of this does need to come cheaply.

Okay, so what kinds of applications are we talking about?

The possibilities are limitless...The possibilities for the Internet of Things are seemingly endless and represent a massive opportunity for device vendors, chip vendors, security software vendors, and providers of embedded operating systems. However, it's important to actually get a sense of what kinds of applications we're talking about. Here's a list of some of the things that can be made "smart":

Thanks to the low hardware costs that ARM mentioned in its previous slide, these sorts of things can be made a reality with fairly minimal silicon dollar content. Of course, adding the non-silicon hardware to make things "smart" (for example, displays on a pair of "smart glasses") could be rather high, leading to initially prohibitive costs, but with scale/time the costs come down and the additional cost of making things "smart" will be far outweighed by the increased utility of these devices compared to their "dumb" counterparts.

Keep an eye out for compelling investment opportunitiesAs with every new "revolution" in computing/technology, there will be secular megatrends worth playing (for example, ARM is likely to benefit as its low-power cores are likely to be licensed for use in many of these devices), and there will be specific companies that actually make the end-user products that will see "glory" if they come up with the right product (i.e. there may be the next "Apple" in the making, such as Google via Nest – or it could be Apple itself that drives this next revolution)!

There will also be component vendors from chips to displays to technologies that we don't even yet know about that will benefit handsomely from these trends and, perhaps, from being in the right designs at the right time. Unfortunately, there will also be a good deal of "false starts" that could lead investors to chase a pot of fool's (lowercase 'f') gold at the end of the rainbow, so to speak. Hearts will necessarily be broken along the way – but so is the nature of investing in "disruptive" technologies. No guts, no glory!

Ashraf Eassa owns shares of Intel and Imagination Technologies. The Motley Fool recommends Apple, Google, and Intel. The Motley Fool owns shares of Apple, Google, Imagination Technologies, and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Ashraf Eassa is a Senior Technology Specialist with The Motley Fool. He's an experienced and passionate technology stock analyst and investor with focus on semiconductor companies. He holds a B.S. in Computer Science as well as in Mathematics from the University of Vermont. You can write to him at aeassa@gmail.com -- he doesn't bite!